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The Stunning Truth about Simplifying Your Finances

Getting out of debt has simplified our finances greatly. We continue to seek out new ideas to simplify our money management system. With that in mind, I’ve been thinking about my RowdyReaders. Over the last few weeks, I’ve received a number of emails asking how we got out of debt so quickly.

Below are a few tips that have helped us reduce stress and manage our money more effectively. The following tips are based on what we have learned from Your Money or Your Life and our own trial and error experiences.

1. Create a basic budget.

Setting up a basic budget will help you estimate your expenses. This is super helpful information, especially if you want to start cutting your costs to lead a minimalist lifestyle or exit the cubicle forest. In some ways, I think budgeting is like dieting. It doesn’t always work. However, I think it’s important to outline your monthly expenses. They might fluctuate, but at least you’ll have a general sense of your financial obligations.

Micro-action: Set-up a basic budget. You don’t need any fancy programs to create a budget; a pen and paper will work perfectly.

2. Use simple tools to track your expenses.

Tracking expenses is a good exercise because it forces you to take a hard look at what you’re spending your money on. In the past we used a program called MoneyDance to automatically track our finances. It’s not a bad tool, but the program made my life a lot more complicated than it needed to be. The tool didn’t help us focus on what we were spending our money on. In essence, we weren’t paying attention. Now we’re using a basic spreadsheet to track our income and expenses. I feel more in touch with our finances as a result.

Micro-action: Evaluate how you track your expenses. Can you simplify the process? Do you use a fancy computer tracking tool or can you use something more basic, like a pen and paper?

3. Pay in Cash

In Your Money or Your Life the authors define money as life energy. We exchange precious, non-renewable life energy for money. Once we know what money really means to us, we’re more likely to be mindful of our spending.

If you use cash you’re less likely to overspend. It’s a whole lot easier to swipe a credit card and disassociate from a particular purchase. Giving up cash is like giving up a treasure. You can actually feel your balance being reduced.

Micro-action: Start using the envelope system. For example, envelopes can be separated by spending category in your budget for things like groceries, dining, laundry, etc.

4. Lots of accounts and automation can lead to errors.

In Unautomate Your Finances Baker talks about how automation can be a good thing. For example, I love having my cell phone bill automatically deducted from my checking account every month. However, Baker also emphasizes that too much automation can lead to unnecessary stress and errors. Having a minimal number of checking, savings and credit card accounts open is much easier to manage.

Micro-actions: Are there any open accounts that you can close? Make a list of all your open accounts and figure out how you can simplify. For instance, we just merged a number of savings accounts into one. We had a tax savings account, tiny house savings, flexible savings, and a small business savings account!

5. Use Credit Cards Sparingly

Using a minimal number of credit cards (or not at all) is key to spending less. For instance, we only have one credit card and use it for car rentals only. In my experience, I’m more likely to go out to eat and buy unnecessary stuff on credit. Using cash has made me more mindful of my purchases.

Micro-actions: Consider the option of going credit card free. If that’s too scary, put your credit cards in a safe place. If they are hidden in a drawer, you’ll be less likely to overspend.

Also, be sure to order a free credit report to see what accounts you have open and what accounts should be closed.

6. Check your online balance.

Before you make any big withdrawals or transfers, check your online bank balance. This seems like simple advice, but mistakes happen. For instance, I made a slight accounting error a few weeks ago and ended up with an overdrawn checking account. I haven’t done something so lame since high school and it was all because I hadn’t reconciled my account balance. Fees on an overdrawn account add up quickly. And that’s money you could be saving.

Micro-action: Be aware of the balance in your checking and savings accounts. Log-in frequently to make sure your purchases have cleared and that they match your own records.

7. Stop buying stuff, sell your car(s) and pay off your debt.

I’ve received a number of emails from folks asking how we got out of debt so quickly. The short answer is: we stopped by unnecessary stuff, sold our cars, and focused on paying down our debt rather than investing money in the stock market.

You can do this too. Getting out of debt won’t happen overnight, but it is possible. It took us two years to pay off $30,000. It was hard, but I’m thankful that burden is gone.

In addition, we continually look for ways to improve our money management system. That includes reading a lot of books, blogs and listening to what has worked for other people.

Micro-actions: I highly recommend simplifying your finances as much as possible. If you’re not sure where to start, read Your Money or Your Life.

*Disclaimer – I am not a financial expert or an accountant. And it’s important to remember everyone’s situation is different. Before you make any big financial decisions, consult a financial professional.

 

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  • Bill April 9, 2010, 7:24 am

    Your money or your Life is one of the best Financial books written. I also recommend The richest man in Babylon for reading.

    • Tammy April 9, 2010, 3:51 pm

      @Bill – Your Money and Your Life is an amazing book. It changed my world view for the better. And thanks for the book recommendation. I’ll check it out of the library. 🙂

  • Rodolpho Arruda April 9, 2010, 8:37 am

    Regarding #2, I use a simple spreadsheet in Google Docs to track my expenses. It is very very simple:

    + Total fixed Income (my salary for example)
    + Total variable Income (money I got from selling some old stuff)
    – Taxes
    – Total fixed costs (things I pay every month)
    mortgage: ______
    energy: ______
    water: ______
    etc
    – Total variable costs (things I eventually pay… and could live without)
    dinning out: _________
    gifts: ___________
    etc
    Total Cost of Living (fixed + variable)
    Gross Balance
    – Transfer to savings account
    Net Balance (this amount should appear in my bank account balance in the first day of the following month. if it’s not there, I check my variable costs. chances are that I forgot to include that lost hand of poker in there.)

    Conclusion: when you can control at least your fixed costs, you begin to learn your real cost of living in the worst case scenario. And I tell you more, there’s no greater satisfaction than to reduce your fixed cost by 20% in a month. You can tell you are living a simpler life.

    Cheers

    • Tammy April 9, 2010, 3:51 pm

      @Rodolpho – we are doing something similar too. Google Doc’s, plus a pen and paper have helped streamline our finances a great deal. And I totally agree with your conclusion. Once you’re fixed costs are under control you can start saving more and get a better idea of what your lifestyle actually costs.

  • Casey April 9, 2010, 11:27 am

    Tammy, I’m so proud of you guys for getting out of debt! Debt has become so socially acceptable that people think it’s weird to not have a car payment. I’m debt-free too, and the potential is HUGE for the future now. I’m working on getting rid of my car and relying solely on a bicycle, and I can’t wait to make the move completely. Your methods seem to closely resemble Dave Ramsey’s, and it’s worth mentioning to anyone who hasn’t heard of Dave – he’s the absolute best there is when it comes to financial success.

    It’s really hard to convey what it feels like to be debt-free, but with people like you spreading the good word often, hopefully more people will be able to experience it. Thanks for always being an inspiration!

    • Tammy April 9, 2010, 3:54 pm

      @Casey – Thank you! A few people have mentioned Dave Ramsey since I published this post. I’m going to check his stuff out – it sounds intriguing.

      Best of luck going car-free. If you have any bike related questions, feel free to contact me. 🙂 I’m happy to help. And thank you for reading the blog.

  • Charley Forness April 9, 2010, 2:38 pm

    I used a simple spreadsheet to track years ago, based on a company that I think was called RSIsoft and they developed a system based on Your Money Or Your Life. This is going back a decade now. It was called Money Man 2.0 and I thought it was very effective for tracking your progress on all of the principals of Your Money Or Your Life including plotting your breakthrough point into FI3. Sadly, I cannot find it on the Internet anymore though I still have an old copy of it. Only problem is that it’s password protected from making any hacks to it.

    So, when I went through my own Debt Repayment plan a few years ago, I just used the Money Man 2.0 sheet even though the dates were all jacked up. If you’re at all Excel savvy you can create something very simple.

    Thanks for sharing your story, Tammy. It inspired me to write our debt free story today.

    Regards,

    Charley

    • Tammy April 9, 2010, 3:49 pm

      @Charley – awesome! I’m super excited that my article inspired you to write something too. I’ll head over to your blog later tonight and read your post. 🙂

      It’s too bad Money Man 2.0 isn’t on the web anymore. But like you said, it’s fairly easy to create a spreadsheet tracking system that suits your needs.

      Thanks for reading the blog Charley!

  • Little House April 10, 2010, 9:56 am

    Thanks for sharing your story. I like how you included that you sold your cars and stopped buying unnecessary stuff (I’m sure the money made from the sale of your cars helped!). I’m getting very close to paying off the remaining portion of my debt. But in my excitement, I started stocking away money into other avenues. A comment a reader left me made me snap back to reality and realize I need to pay off my last remaining debt BEFORE I begin planning for retirement! Thanks again!

  • Tyron April 11, 2010, 9:39 pm

    After years of living paycheck to paycheck I found great tips on Zen Habits and I recently read Unautomate your Finances, I’ve now almost paid up my credit card debt (almost time to cut that bastard up:) I also don’t spend much money anymore which helps the budget a lot, I have a 30 day list for impulse buying, this tip has helped me so much as I have a bad habit of buying books and never reading them. Minimalism and all the people involved in spreading it have really helped me and I thank you all!

    • Tammy April 12, 2010, 2:27 pm

      @Tyron – Awesome! I’m so happy for you. 🙂 Sticking to a budget and thinking about impulse purchases for a few weeks has helped me a great deal. The minimalist lifestyle is a powerful tool for saving money.

  • Kerri Fivecoat-Campbell April 12, 2010, 7:23 am

    Excellent tips, Tammy. I cannot wait until we’re out of debt for good!

  • Antonio April 12, 2010, 11:45 pm

    Oh my goodness, you ROCK! I love this blog, and love this post even more! Will now consider selling my TV, although I only partake in Rachel Maddow and maybe a short documentary every now and then. But the money earned from the sale, and cutting my Cable expense out entirely may provide me with the lift I’ve needed! Way to go and keep up the good work! Yayyyy!

  • JM April 15, 2010, 9:52 am

    One of the first things I always read on these is to pay cash and cut up your credit card. I don’t agree that having a credit card is a gateway drug to impulse spending. My cure for impulse spending was a crappy economy, major income insecurity, and looking around at all the stuff I wasn’t using, wearing, etc – and wishing that money was still in the bank. By putting everything I can on my credit card I have a very easy way to track my spending. I do pay it in full every month.

    • Charley Forness April 15, 2010, 1:33 pm

      Good point JM,

      There’s an oft-quoted study (particularly if you are a Dave Ramsey fan) that says people tend to spend 8 – 12% less when paying with cash…the thought being that it is psychologically more painful to part with money than swipe a card.

      The problem is, nobody has really actually been able to substantiate the source of that study.

      I remember a few years back on the Simple Living Network discussion boards we were discussing this and we challenged the participants to try and find the source, either by google or otherwise and we couldn’t. It doens’t mean that the study does not exist, but it could mean that it is as much of a ploy as the fake 1950’s Yale (Harvard, Princeton, whatever…it changes depending on who is citing it) study of graduates who set life goals.

      The way I look at it is, do what will work for you. It’s based on your own associations. If having everything on your card allows you to categorize and keep track better than cash, then by all means do it. If having to dole out cash stops you from making a purchase, then by all means do it.

      Studies merely show trends, and really don’t accurately reflect the individual experiences and memes we attach to cards vs. cash.

      Just having some means of tracking and categorizing your spending is usually sufficient to open your eyes to any spending holes in your day to day spending.

      – Charley

    • Tammy April 16, 2010, 9:46 am

      @Very good point JM. I do agree with Charley. If you’re able to use credit wisely, then go for it. Personally, I’m unable to do so. That’s why cash works so well for me. 🙂

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